14 Feb 2024
My city career has solely been at Royal London Asset Management but over those 39 years I have seen considerable evolution and development.
Although this may sound like PR, I have never worked with such a fantastic group of people. The quality, experience, and amiability of my colleagues, both within the fixed income team and throughout the company is brilliant. And this really helps. Being able to be open, to trust people, and to reveal doubt and uncertainty makes better decision making.
Last year saw further progress, both in developing new areas like emerging market debt and in maintaining our performance record. Indeed, I struggle with the move to passive management when we have demonstrated high information ratios from active approaches in many areas. Still, the flip side is that we believe the growth in ‘passives’ just gives rise to greater market inefficiencies, from which our clients can benefit. In this regard I was struck last week by comments from a leading US manager, David Einhorn, that the growth of passive strategy was unminding the attractions of value investing. From my perspective, the opposite is the case. Passive credit strategies focused on benchmarks are great – for the active investors. When a large part of the market is agnostic about credit fundamentals the rest can go about continuing to pick better value bonds. Maybe credit is different, although Peter Rutter and his equity teams are doing a great job of demonstrating the merits of active investing.
Working with Trevor Greetham has been a pleasure. Trevor heads up our multi asset proposition and he and his team have given great insights over the years into economic and market developments that impact fixed income. So, I need to pay attention to moves in his Investment Clock – this has just moved back into its Recovery segment, much earlier than we were expecting. Business confidence is perking up, even before rate cuts start, and inflation is falling. As Trevor points out, this is the stage of the business cycle usually associated with positive equity returns and I see that we are adding equities to the already overweight positions in our multi asset range.
This makes my call about ‘recession risk’ look dated. To recap: my view has been that tighter monetary policy, coupled with a squeeze on disposable income through elevated inflation, would give rise to recession in many economies. It seems that I have under-played the role of tight labour markets, and the distortion caused by Covid, as well as business resilience, particularly through the ability of large companies to maintain or increase profit margins. January US non-farm payrolls just reinforced this. As Melanie Baker, our Senior Economist said “All told, not a set of data that is going to encourage the Federal Reserve to cut rates in the coming month or two”. The market is still pricing in reductions in US rates but year-end levels of 4.2% contrast with the more bullish view of 3.9% at the start of the year.
This pattern has been seen in the UK, with the added twist that we had new insights into the UK labour market. The Labour Force Survey (LFS) showed that the unemployment rate is lower than previously thought and has been dropping, to 3.9% in November – a factor that may sway Monetary Policy Committee members from voting for an early cut in base rate. Looking from the start of the year the change in rate expectations has been much greater in the UK, with year-end 2024 pricing now up to 4.4%.
Bond yields reflected the changing interest rate outlook. Yields on 10-year US treasuries closed just below 4.2%, a 15bps rise on the week. German equivalents moved towards 2.4% whilst the UK benchmark yield nudged 4.1%, up 17bps. Credit markets continued to trade well, with spreads trending lower in both investment grade and high yield.
There are clouds on the horizon and I am not giving up on my bearish economic outlook just yet. The UK growth problem remains, not helped by further evidence from the LFS of a growing health crisis. The looming US Presidential election will create uncertainty later in the year, with the well-being of the incumbent a recurring theme. His opponent is likely to further unsettle Western European leaders with rhetoric about the viability of the North Atlantic Treaty Organisation – unhelpful at a time of war in Europe. Mr Trump has a point. Too many European countries are taking a free ride on the back on US military expenditure.
The rugby on Saturday was exciting – in the case of England v Wales more through the tight scoreline than quality of play. At half time, I was intrigued and amused to see the second instalment of the Nationwide advert that parodies the big banks. We believe that our mutuality can be a clear benefit for clients and it is always good to hear that case made.
This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.